Middle market companies across the Western U.S. are bullish on their growth prospects well into 2020, even as they confront near-term economic uncertainty and ongoing market disruptions.

According to the 2019 Umpqua Bank Middle Market Monitor, a survey of 250 middle market companies in California, Washington, Oregon, Idaho and Nevada (regional), economic optimism is high among CEOs and CFOs, but strategic shifts are underway as companies look to remain competitive and position themselves for future growth. Of executives surveyed, 73 percent are actively seeking M&A opportunities, nearly 60 percent are either looking for new foreign trading partners or altering plans for international expansion, and 56 percent are accelerating investment in new technology as a top priority.

“The health of middle market companies is of central importance to the overall U.S. economy as they’re responsible for producing roughly one-third of U.S. private-sector GDP—which totals about $5-6 trillion,” said Tory Nixon, Chief Banking Officer at Umpqua Bank. “The prospect of continued growth is instilling confidence in business leaders, but they aren’t resting on their laurels. Our research indicates that CEOs and CFOs in the middle market are confident they’re on a good growth trajectory but understand that adaptation is critical to being competitive in an ever-changing market environment.”

Regional Middle Market Companies Expect Strong Revenue Growth

According to the survey, a majority of middle market executives expect continued growth during the second half of 2019 and into 2020, with 57 percent of executives expressing they are very confident in the U.S. economy. Furthermore, 99 percent of those surveyed were confident in their own growth prospects, with 35 percent stating predicted revenue growth to be between 11 to 15 percent and 90 percent anticipating their revenue to grow by more than 5 percent, which is significantly higher than the World Bank’s Global Growth predictions of 2.6 percent growth.

Record M&A Activity Set to Continue

U.S.-targeted M&A broke historical Q1 records by reaching a total volume of $537.6 billion across 2,158 deals (according to Dealogic), and the Middle Market Monitor indicates that will continue in Q3 and Q4 with nearly 3-in-4 executives expecting their companies to be involved in an M&A transaction in the next year. Further, roughly half (48 percent) stated they plan to acquire a company in the next 12 months, and 18 percent of companies plan to be acquired in the same timeframe.

Supporting this volume of potential deal activity, the expectation for growth coupled with an unprecedented amount of liquidity sees continued competition for funding. Middle market firms continue to choose bank financing as the top source of growth strategy funding, with private equity financing being used by one in four (24 percent) respondents looking at alternative sources.

In an unpredictable economy, middle market businesses have traditionally sought to leverage international opportunities to improve margins and scale. However, 90 percent of middle market leaders claim trade disputes with China have already impacted their approach to international business. Nearly 49 percent are now actively looking for new markets (outside of China) to help drive expansion, and nearly 10 percent have delayed expansion internationally. That said, only 25 percent believe the ongoing trade and tariff dispute will impact their growth plans long-term. With a historically tight labor market, an increase in the minimum wage registers as a slightly greater concern, with 26 percent of respondents indicating this would have a larger impact on business.

“The opportunities to reduce risk domestically exist but are complex,” said Richard Cabrera, Executive Vice President and Head of Commercial & Corporate Banking at Umpqua. “Providing middle market businesses with sound counsel on where and how to expand internationally is a critical part of diversifying their supply chains and strengthening their market position. It can be advantageous for companies to pivot and look to other markets to grow.”

Investment in Disruptive Tech Is a Priority

Leveraging new technology remains at the forefront of corporate strategies for middle market companies, with 61 percent of executives saying technology has already provided more opportunities to build and shape strong relationships with customers and vendors. Looking ahead, investments in new technology will be critical for 56 percent of companies in the next 12 months. More than 90 percent also plan to invest in technology to streamline operations, with 62 percent noting they are currently automating human work, showing they already expected this disruption, which mirrors actions seen in larger corporations.

At the same time, 24 percent of middle market leaders are looking to make investments in talent training/education that may help them execute against a digital transformation. Investments in talent training/education are expected to increase in the coming years as the survey found that nearly half (47 percent) of executives expect their workforce to experience the most disruption in the next five to 10 years.

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